Skip to comments.QE for Dummies
Posted on 03/24/2013 12:00:12 PM PDT by betty boop
A PeakProsperity.com reader recently lamented:
I have been trying to get my head around the mechanism of QE. Not being an economist or experienced investor I don't really understand a lot of the jargon. The usual simple definition of QE as "thin air money printing" does not satisfy my need for understanding either. Have hunted for a description of QE for dummies that leaves me feeling like I get it, but with no luck. My difficulty is in understanding how thin air money gets into circulation.
So I'm going to do my best to answer this plea in as intuitive and straightforward a manner as I can. I, too, share the need to understand the mechanism of a process in order to feel like I have a grasp of it. And I think it's critically important to understand QE (also known by its full name, "quantitative easing") and what it really represents. Because it is, without a doubt, one of the largest market-shaping forces of our times.
Further, it presents extraordinary risks and may well turn out to be a decisive shaping process for the future, as well. And not in a good way.
Despite its sophisticated-sounding name, QE is nothing more complicated than the Fed buying "assets" from commercial banks and other private financial institutions. I put assets in quotes because the Fed does not buy things like land, Stradivarius violins, diamonds, gold, or silver from these institutions, but rather various forms of debt.
The main forms of debt purchased are Treasury bills/notes/bonds and Mortgage Backed Security (MBS) paper.
(Excerpt) Read more at peakprosperity.com ...
The Fed has run out of "tools" And it has no "fall-back position." So it just keeps on doing what it's been doing over that past decade or so. Like a lunatic in an asylum who expects that the repetition of the same behavior is gonna get him a "different result," next time.
What are you doing to protect yourself and your family? There has got to be some seriously hard sledding ahead, if history is any guide....
Nullify all his “laws”.
Arrest all those who put him in WH
Fumigate the WH
Vote some sane people into government with term limits.
Return this country to one that Founding Fathers established!
Go for it! (Go SARAH!!!!)
OK, but not my brother-in-law. He may be naive but he's basically a good guy. But, like I said, OK on the other 80,000,000 or so.
Wait, you have to exempt my sister-in-law too.
Pssst.. come here for a minute..
Don’t tell anybody I told you BUT...
If the gov’t can tax you on something you own, you’re paying RENT on it(to the gov’t)... i.e. property taxes.. etc.
Not only that but before you bought it..
The government taxed the building of it, all the material you bought to build it.. the purchase of it..
Property taxes is the rent you pay to live in it..
Not to speak of the UNIONS exacting tribute at the same time the gov’t is shearing and milking you..
QE is the opium for the financial industry..
The gov’t is the pusher.. https://www.youtube.com/watch?v=GN6eTXA0VlI
When our annual government deficit was merely $400 billion, there was enough capital in the world financial markets to absorb it. When the deficits skyrocketed to $1.5 trillion, it exceeded the wrold’s financial capacity to absorb it. So the government invented QE; selling it’s debt to banks, and then buying it back with money printed by the Fed. Just like how the Germans financed Ww1. We all know how that turned out around 1923.
I really am troubled by this QE business. Please see the full article if you have the time and interest to see details regarding the impending financial/economic implosion that QE seems quite likely to entail. If history is any guide.
Shades of the Weimar Republic. Which was first and foremost the casualty of cultural decline translating into the conduct of public finance. Hyperinflation and public chaos was the result. And then, of course, the "Strong Man" had to be introduced, to "restore the public order."
And as they say, the rest is history.
Thus nowadays it is widely conceded that "culture precedes politics."
But then you have the "progressives" [who tend to be atheist and Leftist all at once, go figure] who see matters in a different way: They hold that politics is prior to, and thus is the entity that shapes culture.
Then, and only then, can you get your own house-brand of politics to work out right....
Sigh. Second realities at work here....
Thank you henkster for writing!
Why the trouble?... What is.. IS.. and what ain’t.... AIN’T..
FAilure to learn from history dooms to repetition of it..
It’s coming.. like a cyclone you can see with your eyes.. and even hear..
Being prepared for it as much as possible.. is the wise choice..
If you cannot prepare in some aspects,, THEN YOU CANNOT..
Being prepared in the ways you can(or are willing to) prepare is mandatory..
Being totally UNPREPARED is just stupid.. many have seen this coming for decades..
What if it “DON’T” come.. (the collapse of society)...
Then you will have too much ammo, rice, beans and water storage containers.. on hand..
NO problem really.. and you can laugh at yourself in the mirror..
The Failure of Civility has happened many many times worldwide..
and will again... maybe here in the United States.
If the Fed tries to end this properly, interest rates will shoot up and the Federal government would quickly use up revenue on interest payments and part of the entitlements. But the longer they do it, the worse the outcome. They probably just hope to get a big enough bubble of some sort where they can sell off assets and perform a currency devaluation with the support of governments and unions.
The Fed has no recourse at this point, to "end things properly." It's spent all its bullets already, and no longer has ammunition....
QE is the "price support program" for federal debt. Aggressive buy-ins by the Fed of federal debt securities using magically appearing "money" supports the price of federal bonds in the marketplace.
In the "real world," this sort of thing would be regarded as "self-dealing in one's own securities," which is a federal crime. In a private company, the management presiding over any such state of affairs would be dragged out from their offices in handcuffs, and thrown in jail.
Notwithstanding. The Fed's object is to keep the bond price effectively at "par," so to produce a [current] yield of practically zero percent which punishes savers, because it is a "negative rate of return," after adjusting for inflation.
Evidently the Fed is saying that they will keep effective interest rate to an effective return of zero percent on capital as long as it takes the unemployment number to reach 6.5 percent. They stopped caring about the prospects of extreme future inflation a long time ago....
Bottom line: What the Fed has been doing is to shore up the price of federal debt obligations long-term bonds especially, but also with a hat-tip to Fannie Mae and Freddie Mac to absorb, at phenomenal taxpayer expense, from now as far as the eye can see every piece of trash security that has ever been issued by the federal government or an entity under its auspices during the past five years at least, all to pay for the incorrigible "sins of the past." I.e., government promises made that could in no way ever be satisfied. And the "Lawgivers" knew it at the time.... E.g., the entitlement programs generally.
Thus the unprecedented "wealth transfer" alluded to in my last: Accounts must be settled, one way or another.
[Read the article. Do the math. ]
As if parsimonious Nature could ever forgive such gratuitous abuses....
Thanks so much for writing, palmer!
Seems to me they just keeping shifting the bubble to elevate the market in the hopes the economy will take off, generating enough wealth to ultimately swallow the moving bubble. The bubble was in real estate, then insurance, then banks, etc.
The bubble will either move or pop. If the banks keep holding the Q.E. phoney money instead of lending it out (the theory being that will cause the economy to bootstrap) - it'll surely pop.
The only way to avoid it is to introduce real new money into the economy. And there are only two ways to create real new money: mining and invention. Everything else just shuffles money around.
As Sarah would say: drill, baby, drill. Bring enough U.S. oil into the market to drive the price down by 50% and the economy will take off.
Or perhaps there is a new invention out there, like the personal computer, which can create new money.